Employers please note that the National Minimum Wage rates are increasing from 1 October 2013. They will be:
To simplify accounting and tax reporting for the smallest businesses, from 6 April 2013 small businesses can choose to calculate profits/losses on the basis of the cash received and expenses paid out. This is known as the cash basis, and it ignores debts owed by the business and amounts owing to the business, until those amounts are paid. The normal accounting method is known as the accruals basis.
The cash basis will only be available to businesses which operate as sole-traders or partnerships, and whose turnover is under the VAT registration threshold (£79,000 from 1 April 2013). Some other businesses will be barred from using the cash basis and these include:
- All companies and LLPs;
- Farmers using the herd basis;
- Any business using profit averaging over several tax years;
- Businesses in a mineral extraction trade; and
- Lloyd’s underwriters.
Once a business is using the cash basis it can carry on doing so until its annual turnover is twice the VAT registration threshold (£158,000 from April 2013).
Although apparently simple, the cash basis will have some disadvantages:
- The deduction for loan interest paid will be limited to £500 per year; and
- Losses can only be carried forward to set against future profits, whereas under the accruals basis losses can be carried back in the first four years of the trade and set off against the trader’s other income.
In addition any unincorporated business, whether or not they are using the cash basis, will be able to use flat rate expenses to replace the calculation of actual costs incurred in these categories of expenses from 6 April 2013:
- Motoring costs (mileage at 45p per mile);
- Use of home for business purposes (based on number of hours used per month); and
- Private use of part of commercial premises, such as a public house (based on number of occupants who are business owners or their immediate family)
As these flat rates are completely optional, and will vary in effect in each business, we need to discuss if the flat rates will be suitable.
It is common for unmarried couples to jointly own a property. Cohabiting couples with assets in excess of £650,000 may be subject to inheritance tax at 40% in the event of one of them passing away. This is as a result of each individual may have up to £325,000 worth of assets that can be transferred free of inheritance tax on their death to non-spouses - this is called the nil rate band.
The above is not the case for married couples, as assets left to a spouse is exempt from inheritance tax and in addition the unused element of the nil rate band of £325,000 is transferred to the surviving spouse meaning the amount of £650,000 worth of the surviving partner’s death estate may not be liable to inheritance tax.
Capital Gains Tax
A key point is that married couples can transfer assets between each other without being subject to capital gains tax. As a result of this, married couples can transfer assets to each other freely to ensure that the capital gains annual exemption of £10,900 is fully utilised on the subsequent sale, for example on a rental property that is owned by one of the married couple prior to a sale of this property, half of the ownership can be transferred to the their spouse meaning upon sale of the property the married couple can fully utilise the capital gains exemption of £21,800.
Other areas to consider
Married couples allowance applies when one of the married couple was 65 before 6 April 2000 when the universal married couples allowance was withdrawn.
Don’t miss tax credits renewal deadline Individuals who were claiming tax credits for 2012-13 should be receiving a “Renewing your tax credits – Getting it right” pack.
It is vital that you complete the Annual Review form for the year ended 5 April 2013 and send it to the Tax Credits Office (TCO) Preston before 31 July 2013. Failure to do this will result in your tax credit payments being stopped and you may have to pay money back.
Claimants should note:
There have been a few queries around how to correct errors made on an FPS, eg to correct an under reported amount of pay or deductions. HMRC’s guidance at http://www.hmrc.gov.uk/payerti/reporting/errors.htm#3 reflects HMRC's preferred way of reporting corrections.
An overriding rule is that if the correction necessitates an additional payment to the employee outside of the regular payroll cycle you must submit an additional FPS on or before the date of the additional payment. Eg if you pay an employee and report the pay on an FPS and the employee spots that he has been underpaid and you correct that by making an additional payment.
If the employee was paid inside that regular payroll cycle, but the incorrect amount was reported on the FPS, because between submitting the FPS and paying the employee the amount payable changed (eg due to you receiving information confirming the hours worked were different to expectation) then the current HMRC guidance states that you can either:
However, some software defaults to submitting an amended FPS showing the recalculated pay for the period. Accordingly, HMRC have confirmed that their advice at: http://www.hmrc.gov.uk/softwaredevelopers/rti/errors-corrects-payroll.pdf still stands, that is, ‘our systems will cope with an FPS that states the total recalculated pay for the pay period rather than just the additional amount as long as the year to date figure is correct.’
RTI enabled software will follow one or other of these methods.
The fundamental requirement is for the year to date figures for the latest RTI submission to be as accurate as possible. HMRC and DWP will use the most recent year to date values to update their systems.
New Childcare Scheme from autumn 2015
A new Childcare Scheme will be introduced to support working families with their childcare costs and will replace the current salary sacrifice scheme. Unlike its predecessor, the new scheme will be available to the self-employed and those on a minimum wage. Also parents will be able to choose their own voucher provider, as the new system will not be administered by employers.
Claimants will fund 80% of their childcare costs up to £6,000 per child. The remaining 20% (up to £1,200) will be subsidised by Government. From the first year of operation all children under 5 will be eligible and the scheme will build over time to include children under 12.
The scheme will provide support for families where:
Support will be provided through a childcare account redeemable at any registered childcare provider. The new scheme will be phased in from autumn 2015 as the current system of Employer Supported Childcare is phased out. The Government will shortly consult on the detail of delivery.
National Insurance £2,000 employment allowance
The Government is to introduce an allowance of £2,000 per year for all businesses and charities to be offset against their employer Class 1 secondary NICs' bill from April 2014. The allowance will be claimed as part of the normal payroll process. The Government will engage with stakeholders on the implementation of the measure after Budget 2013 and is seeking to introduce legislation later in the year.
Although this change is a year from now, the allowance should be factored into your payroll budgeting for next year. It is likely that payroll software will be updated to allow for the £2,000 reduction in employers' Class 1 secondary NICs. For smaller businesses contemplating their first or further appointments into the employment arena this will be a welcome support.
Employers' Class 1 secondary contributions are 13.8% of any wage or salary that exceeds the secondary threshold, currently £148 per week (£641 a month, £7,696 per annum). New employers could pay a salary or wage of up to £22,189 per annum to one employee and be liable for no employer's National Insurance ? ordinarily, employer's NIC on this level of salary would amount to £2,000.
This scheme is not intended to replace salary sacrifice arrangements that will continue to offer employees and employers NIC savings. Whether it will help to stimulate new job creation or reduce unemployment is an open question.
Mortgage support - Help to buy
In the distant past Government supported home buying by offering tax incentives. It has been some years now since UK taxpayers could obtain tax relief for mortgage interest payments. The MIRAS arrangement, where tax relief at the basic rate was deducted from mortgage interest payments by the lender, was the last and fading effort at stimulating home buying in this way.
Instead George Osborne and his team have elected to try out two alternative systems: an equity loan scheme and a mortgage guarantee.
Help to buy: equity loan
This scheme will run for three years from 1 April 2013 and is proposed to provide £3.5bn of additional investment.
Help to buy: mortgage guarantee
This scheme will run for three years from 1 January 2014. Buyers will need to secure a mortgage from a lender who should be encouraged to offer better access to low deposit mortgages by the Government guarantee.
Real Time Information (RTI) slow down
The following quote is from information recently published to HMRC's website:
'HM Revenue & Customs (HMRC) recognise that some small employers who pay employees weekly, or more frequently, but only process their payroll monthly may need longer to adapt to reporting PAYE information in real time. HMRC have therefore agreed a relaxation of reporting arrangements for small businesses.
Until 5 October 2013, employers with fewer than 50 employees, who find it difficult to report every payment to employees at the time of payment, may send information to HMRC by the date of their regular payroll run but no later than the end of the tax month (5th).
This is a temporary relaxation to give some extra time to small businesses that pay weekly (or more frequently) but who only run their payroll (or use an agent to run their payroll) at the end of the month. This extra time will enable these businesses to adapt their processes or change their arrangements with their payroll service supplier so that they can comply with the new legislation.
From April 2013, employers who choose to take advantage of this relaxation will still need to report their PAYE in real time by the last payday in the month or the end of the tax month (5th) at the latest.
This is not a withdrawal of the requirement to report PAYE in real time. All employers are still required to operate PAYE in real time and we expect most employers to be reporting PAYE in real time from their first payday on or after 6th April.
From 6th October all employers will be required to report PAYE in real time each time they pay their employees. However HMRC will continue to work with employer representatives during the summer to assess and understand the impact of RTI on the smallest businesses and consider whether they can make improvements to real time reporting which will address their concerns without compromising the benefits of RTI or the success of the Department for Work & Pension's Universal Credit.
HMRC recommends that employers and agents move to real time reporting as soon as possible in order to give them time to refine business processes before automated penalties are implemented. Employers using commercial payroll software will find that their payroll software is designed to submit their PAYE information as part of their integrated payroll processes. So these employers should continue to or start to report "on or before" each payment is made to employees as this will be the easiest and quickest way of operating their payroll.
Software developers have been informed that they do not need to change their products to accommodate this relaxation.'
Business owners who are still unsure how these changes affect their business should contact us ASAP.
This is a new HMRC Online system that will be introduced from April 2013. It will require employers to file their payroll details with HMRC every month/week before they are able to pay their staff. This means employers will no longer be able to give cash advances to staff which then later deduct from their wages.
Currently employers only file a summary of this information once a year which has led to issues in recent years with individuals under or overpaying taxes due to incorrect tax codes. This new system will mean that the information held by HMRC should be up to date and hold accurate details of an individual’s earnings at any point during the year.
HMRC claims that RTI will:
Payments and penalties
Under the current system of annual filing HMRC are unable to tell if employers are paying the correct amounts of PAYE & National Insurance contributions throughout the year however the new monthly reporting system will enable them to check this.
The penalty system was updated in 2010 in anticipation of the new RTI service and penalties will be imposed based on the number payment defaults on a percentage basis. The percentage penalties range from 1% for 2 to 4 defaults in the year to 4% for 10 or more. Employers paying 6 months late will incur a penalty of 5% with a further 5% charged if the payment is 12 months late. HMRC have said that they will issue warning letters for first and second defaults before penalties are issued so that employers are aware of the risk of incurring penalties.
Payroll software will need to be updated so that it can pass the information to HMRC. All payroll software developers will have accounted for this but you need to make sure you have got the necessary update. If you are not using payroll software you will need to use this going forward, however there is some free software provided by HMRC called Basic PAYE tools that is available for small employers.
There will be a payroll alignment process before each employer goes onto the RTI system so it is important to make sure you hold all the necessary employees details beforehand (name, address, National Insurance number and date of birth).
Owner managed businesses
We had been hoping there would be an exemption for owner manage businesses who currently only file an annual payroll return as they are paid below the limits for Income tax and National Insurance. As the deadline is fast approaching and nothing has been announced we have to assume that these businesses will now have to file a monthly payroll return under the new system. This is a big increase in form filling for small businesses when the government had pledged to reduce red tape for businesses.
You may find this HMRC checklist useful http://www.hmrc.gov.uk/payerti/getting-started/business-readiness-checklist.pdf
HMRC has issued around 850,000 late filing penalties for the tax year ended 5th april 2012 which was due by the 31st January 2013. Remember the penalties apply regardless of whether there is a tax liability or not, the cap of earlier years has been scrapped.
Only one-fifth of small firms ready for Real Time Information, finds survey
A record 9.61 million people filed and sent their self-assessment tax returns on time this year, with 7.93 million sent online, HMRC has revealed.
Licenced Accountant in Brighton